Commercial disputes are often better settled through arbitration than through the courts. This applies to disagreements involving crypto-assets as much as any other area of business, such as Andrew Pilott Explain.
As cryptocurrencies, non-fungible tokens (NFTs), and other crypto-assets continue to grow in popularity – if not always in value – the number of disputes is also increasing. The innovative, fast-paced, loosely regulated and often ‘Wild West’ nature of the market means that there are frequent disagreements between the parties involved. The fact that it is decentralized and international, spanning different countries and legal systems, makes it harder to determine who is wrong and how to resolve arguments between crypto issuers, investors, trading platforms, and other participants.
Probably the most high-profile example to date is the lawsuit filed last year by thousands of plaintiffs seeking hundreds of millions of dollars in damages from Binance, the world’s largest crypto exchange. The case will go to arbitration and is being led by US law firm White & Case and Swiss litigation funding provider Liti Capital under the rules of the Hong Kong International Arbitration Center.
In fact, Binance and other crypto companies prefer arbitrators to traditional courts. Their terms and conditions require that all claims be resolved through legally binding arbitration. This is why Nifty Gateway, an NFT (non-fungible token) auction house, sued an investor for non-payment of an NFT through JAMS, a New York arbitration service provider.
And in 2020, a class action lawsuit against entities behind crypto firm MakerDAO, alleging they misrepresented investment risks, was referred to the American Arbitration Association.
What is Arbitration?
First of all, it’s worth saying that I’m not a lawyer. However, a good search in the Cambridge Dictionary, arbitration is “a process in which an independent person”, an arbitrator, “makes a formal decision which puts an end to a legal disagreement” between persons or companies “without it is necessary that it be determined to look for it”.
Cases are heard by a tribunal composed of one or more arbitrators, using the rules and administrative support provided by arbitration institutions such as the London Court of International Arbitration (LCIA), the Arbitration Center Hong Kong International, the Singapore International Arbitration Center and the International Center for Settlement of Investment Disputes which is part of the World Bank. Institutions like these have a proven track record of helping resolve business disputes of all kinds in many jurisdictions.
Other key aspects of officiating include:
- All parties must agree to resort to arbitration. Usually they agree to use it at the same time they enter into a contract, in an arbitration clause. However, if such a clause is not included in the contract, they can always enter into an arbitration agreement in the event of a dispute if both parties agree.
- It is more flexible than a legal procedure.
- The party initiating arbitration is called the “claimant” because it is making a claim against the other party, and the other party is called the “defendant” because it is responding to the claim.
- Parties present their positions through “briefs”, usually through legal representatives, in writing or orally or both.
- The arbitrator or arbitrators settle the dispute and issue an “award”.
- Arbitration makes it easier to get money held offshore. If a losing party refuses to pay, it is easier for the winning party to enforce an arbitration award in a foreign country than a court decision. Almost every country in the world has agreed to recognize and enforce awards made by arbitrators.
- Arbitral awards are almost always final, while court judgments can usually be appealed to a higher court.
Arbitration for Crypto Disputes
Arbitration has many advantages as a way to resolve disputes arising from crypto-assets. “It provides certainty of jurisdiction, a neutral forum and, in principle, broadly enforceable awards,” says law firm Clifford Chance in a recently released report, Arbitration for Disputes Related to Crypto-Assets and Smart Contracts.
This is a confidential process, especially important for disputes involving commercially sensitive information. Another benefit is the ability to appoint arbitrators with specialized knowledge to handle highly technical issues such as coding and other aspects of blockchain and other types of distributed ledger technology (DLT) that underpin crypto-assets and smart contracts. Smart contracts are digital contracts stored on a blockchain that are automatically executed when predetermined terms and conditions are met by each party.
Andrea Utasy Clark, senior partner at law firm Pinsent Masons, in an analysis published in September, explains that cryptocurrency disputes “are well suited to arbitration and are increasingly referred to it. “. Indeed, “the decentralized nature of crypto aligns with the neutrality of arbitrage, and both promote participation in multiple jurisdictions.”
The types of crypto disputes currently handled by arbitration, she adds, include breach of contract claims by investors against platforms resulting from lack of access to the trading platform, and by platforms against investors resulting from payment default; claims of misrepresentation by investors against the platforms regarding the investment risks represented; and claims relating to the enforcement of arbitral awards in national courts.
In September, I attended Reya’s Mishcon Seminar on Metaverse Retail, and the topic of Metaverse brand valuation came up. How will an arbitrator handle a dispute on the Metaverse? I’m pretty sure the next ten years will see a boom in online sales within the Metaverse which will no doubt increase the number of trade-offs between vendors, coders, noisy Metaverse neighbors, etc. We are already seeing several consulting firms and law firms entering the metaverse for this reason.
The Binance Case
Arbitration with the Binance crypto platform – which operates worldwide and is incorporated in France, Spain, Italy, the United Arab Emirates and several other countries – has been initiated by users who claim to have lost millions when the platform failed on May 19, 2021, leaving them unable to exit their positions as crypto prices fell. US law firm White & Case is coordinating the action for the plaintiffs, while Swiss litigation funding provider Liti Capital is funding the case up to $5 million in return for a plus 30% return on investment. award or settlement.
Liti Capital is a private equity firm that raises funds from retail and institutional investors to invest in legal actions. There are now thousands of plaintiffs in Binance’s claim in what Liti Capital considers “the first ever class action in the crypto industry” and “a landmark event in defining how organizations operating in industry behave and treat their customers”. David Kay, CEO of Liti Capital, said that “crypto and blockchain are the future, but they just need to be cleaned up, it’s the Wild West out there.”
According to Binance’s terms and conditions, users seeking compensation are required to file disputes with the Hong Kong International Arbitration Center, which is costly for an individual. Details on how to join the class action are available on the website www.binanceclaim.com, which was set up by Liti Capital and other representative plaintiffs. He explains that traders who believe they are entitled to compensation should first contact Binance, and if they are unable to resolve their dispute “they can sue Binance in international arbitration.”
An arbitration award does not guarantee payment
Even if the plaintiffs obtain an arbitration award, it may still be difficult, if not impossible, for them to receive the money. First, respondent assets may be difficult to trace and, even if located, may be impossible to recover. Second, although most countries recognize arbitration awards, some may not enforce an award related to crypto-assets if crypto-assets are illegal in that country, or for other reasons related to those types of assets.
“Given the nature of crypto and the players involved, the risk of asset dissipation is…acute, and establishing and quantifying losses is often more complicated,” writes Andrea Utasy Clark of Pinsent Mason. “Furthermore, some jurisdictions have held that enforcement of an award rendered in crypto-related arbitration may violate the public policy of that jurisdiction and prevent enforcement.”
The public policy exception is enshrined in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and has been used on several occasions. For example, the Shenzen Intermediate People’s Court in China overturned an arbitration award made by an arbitral institution on public order grounds because, as Ms. Utasy Clark writes, “China has banned crypto and does not recognize digital currencies as having legal status”. .
As with any legal action, pursuing a crypto-related claim through the arbitration process is no easy feat. However, if an aggrieved party cannot obtain redress by dealing directly with the party alleged to have caused that grievance – using either in-house legal expertise or an outside law firm – then arbitration is probably the best, and often the alone, alternative.